Inflation intensifies as US money supply explodes

I am not naturally pessimistic although you could be forgiven for thinking so. I was writing about how sunny the outlook was on Forbes before the coronavirus hit. That’s not to say I’m not deeply pessimistic about the road ahead.

If I put my best optimistic foot forward I can say that life will go on and for most people a good chunk of less in their lives won’t make much of a difference to their net happiness. However, net worth is going to take a big hit.

You can never be sure you are right and so the only thing to do is to examine your thinking and any new data that comes out with a view to falsifying your theorem or modifying it is to embrace the changed circumstances. There are a lot of unknowns that could drastically change the model or give it details or even upset it. I would definitely like my model to be turned upside down. It would be great to be able to do a 180 and say, “Everything is going to explode quickly.

Yet the more I watch, the worse it gets.

You must like the Federal Reserve, it really hides nothing. When I saw this I have to admit my jaw dropped:

Here is the table of it:

A 33% increase in M1 (the most liquid part of the money supply) over the past 12 months. A 105% increase (if you annualize it) over the past three months to May. You would say that’s a 33% inflation rate built in right now.

Well, don’t take it from me. That’s what the ECB says. (Love that they have a non-technical summary for “normal people”.) Here I choose:

“While the long-term close association between the price level and the money supply is widely accepted in the economics profession…. The analysis also clearly indicates that at longer horizons, broad monetary aggregates exhibit better leading indicator properties for future inflation than narrow aggregates.

From 2009, a less sensitive approach to inflation and money supply. “Over the past two centuries, the fraction of the long-term variation in inflation explained by long-term monetary growth has been very high and relatively stable in the United States, the United Kingdom, and several other countries. “

And this little nugget: “The central predictions of quantity theory are that in the long run, monetary growth should be neutral in its effects on the rate of growth of output, and should affect the rate of inflation on a one for one. . –RE Lucas, Jr.1”

Interestingly, it is the Kansas Federal Reserve that disagrees. You have to differ.

There’s a get out of jail card buried in the text. If there are negative liquidity shocks, this counteracts the effect of printing, as well as a fall in the velocity of money. So to counter this huge inflation pump, the Fed may QT. We’ve seen how quantitative tightening kills the market in 2019, and a market drop burns trillions in wealth and takes away the punch bowl.

This is what we have just seen in the Fed’s balance sheet. He QT’d in June 2020 to cut the Nasdaq’s vertical ascent.

The Fed’s balance sheet is the lever on which the future economy, its markets and its assets depend. So the plan is to pump and dump QT, to keep things in the air but not too high with the dump to cut inflation when the baked 30% threatens to appear at the end of the pipe.

It is a plan; It can work. Economists like to think of the economy as plumbing, and this blow-and-suck model fits that perfectly.

But there is a bug. If the Fed thinks it will be allowed to cut the semi-crippled US economy to the ankles with quantitative easing as inflation hits, it is going to have a nasty political fight on its hands. With either side of the White House aisle trying to flip the money supply to avoid a surge in inflation will not be politically feasible with ripped government budgets and with the Federal Reserve likely to print furiously to monetize public debt. or stuff it into proxies.

Why even worry about fixing inflation when it shows up 12 months from now? Better to fight to live another day than dead.

We all still know that the final consequences are still developing, the economy is still bound to deteriorate for a long time, and the only improvement is the slowing down of the rate of fall.

So what should an investor do?

The call is always, are we going to have deflation or inflation? I think of inflation. As such, we only have to look at these two pages from the Fed to understand how this will play out.

There are three assets to balance: cash, stocks, and gold/bitcoin. The more an investor anticipates inflation, the more he must direct the value towards the pole of gold.

  • Inflation below 10%: a little money, a lot of stocks, a good piece of gold/bitcoin
  • Inflation below 20%: minimum cash, one piece of stocks, one piece of gold stocks, one large piece of gold/bitcoin
  • Inflation above 20%: Debt or if you don’t want that or if you can’t get the lunch money, a little stock, a big chunk of gold stocks, a lot of gold/bitcoin,

Remember, in a bubble the explanation is, “This time it’s different,” and in that currency bubble where in the past everyone was yelling “inflation is coming,” that’s what the Fed is telling us.

By praying for miracles we must prepare for the alternative.


Clem Chambers is the CEO of the leading private investor website and author of 101 Ways to Pick Stock Market Winners and Cryptocurrency trading: a beginner’s guide.

Chambers won Journalist of the Year in the Business Market Commentary category of the State Street UK Institutional Press Awards in 2018.

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